New Types Of Policies Close The DI Coverage Gap

Despite enrolling in DI coverage, many professionals are still underinsured.

By Martin Levy

Most people insure their material possessions — their homes and their cars. But many people don’t recognize what is probably the most valuable asset — their ability to earn an income. If a person becomes sick or injured and can’t work, will that person be able to pay bills and maintain the same or a similar standard of living?

What are the odds of becoming disabled? That’s an odd question. It depends on what you read and what someone considers a disability. But understanding the comprehensive nature of a client’s particular occupation — what must happen in order for them to fully be able to earn a living — may diminish their interest in the odds in favor of simply recognizing the power of protecting themselves. Let’s say it’s a much larger concern for higher earners.

Young professionals, and in particular law students, were taught early in their adult lives that their most valuable asset was their ability to earn a living.

When choosing to go to school, they committed to an investment in their careers, took on significant debt, or committed to certain employment relationships to assure they would be able to fulfill their financial obligations. They became comfortable with a particular lifestyle, perhaps have families, acquire assets and commit to education obligations. Thus, they began to earn.

Most were taught to seek and purchase disability insurance as a means of protecting their incomes from disruption. That was likely true then, and it still is today. However, much has changed in the business of protecting clients through disability insurance.

Here is a brief overview of the DI scene, looking backward and forward.

Individual Disability Insurance

Years ago, professionals had many choices with respect to the purchase of a disability policy. There were many from which to choose and contracts were broad in nature, and specific in their definitions to qualify for benefits, and had a host of consumer-centric riders that enhanced the policies. Riders included such things as a cost-of-living adjustment that kept benefits growing, a return-of-premium benefit that may have refunded some or all of the premiums, and even a nondisabling injury benefit that paid cash. They almost always included either a residual or a proportionate income rider, or both.

More significantly, individual DI policies had an “Own-OCC,” or “own occupation,” definition of disability. A typical noncancelable individual DI policy defined total disability as follows: “Solely due to sickness or injury, you are unable to perform the material duties of your regular occupation — even if you are able to work in another occupation!” Your occupation meant “the occupation or occupations (if more than one) in which you are gainfully employed for the majority of your time, at the time you become sick or disabled.”

Carriers further refined the definition of your occupation to a single specialty.

Contracts recognized that specialty, and they and paid benefits based on the insured person’s inability to do that specialty. Your client theoretically could be a trial lawyer, suffer an injury precluding them from going to court, and earn a comparable income doing office work and receive full benefits. That was powerful stuff!

Even more compelling, carriers also provided residual and/or proportionate benefits — which provided that should injury or sickness disrupt your income (but not necessarily lead to a reduction in time lost at work), so long as you suffered a loss of income — you would also receive some percentage of benefits.

In the mid-1990s, insurance companies began to see a dramatic rise in claims. Some DI policies made it simply too easy to substantiate claims, and in many cases, people took advantage of the carrier’s favorable wordage. Also, when many physicians became dissatisfied with the way managed health care changed their practices, they soon recognized that their DI policies could hasten their retirement, so they began to file claims in record numbers. Carriers were unprepared for this increase in the number of claims.

This challenged insurance companies, and many recognized they had issued policies that were simply too generous and that made it too easy to substantiate a claim. Individual disability underwriting became more stringent, costs for new policies rose, underwriting tightened, and the industry was challenged with lawsuits over claim disputes.

Into the early 2000s, a class action lawsuit against one of the leading individual DI carriers resulted in uniform changes to contract language, easing the burden on claimants’ ability to collect. But policies became more difficult to acquire, there were limits on claims for back/neck and mental/nervous disorders, and individual DI carriers figured out they could no longer compete. The availability of noncancelable DI options for attorneys became limited.

The combination of a booming economy, a dramatic rise in incomes and the lack of evolution in DI products meant most professionals were left woefully underinsured.

Group Disability Coverage

Many professionals who were underinsured sought ways to increase their protection. If a professional had a staff, they could purchase employer/association group disability insurance and add a secondary layer of coverage to their individual plan.

These group contracts were significantly different from the broad individual plans. These plans integrated with government benefits and limited claims for conditions such as spinal and mental health conditions. Nonetheless, they added coverage — giving the insurer more discretion over when they would be obligated to pay a claim.

When crafted properly, this group coverage would pay in addition to what any individual coverage would pay. Further, proper design, with premiums passed through as income, would ensure that benefits would be received tax free — just like the benefits from individual DI policies. Still, the group coverage was limited to 60% of the insured’s income. Even if the additional benefit was $10,000 or $15,000 a month — many were and are still grossly underinsured as a relation to their expenses and lifestyles.

Supplemental Buy-Up DI

The limits of older individual DI plans, even when combined with a group DI plan,

still left many professionals underinsured. Lifestyles and incomes had simply outpaced the disability market. Insurers were reluctant to provide anyone with enough disability benefits to give them peace of mind that they could meet their financial obligations. People were simply spending more than they could protect and were still dependent on their health to earn a living. Insurance markets responded with supplemental buy-up coverage. These policies can offer simplified issue or, with three or more participants, even guaranteed issue. These are also own-occupation-specific contracts, allowing professionals to become insured and secure reimbursement of up to 70% of their income upon sickness or injury. As a result of this offering, many professionals can now Increased Accident Rate Could purchase coverage that supplements both their individu-

Pose Potential Opportunity al and group coverage. » The disability insurance industry is expected to Lifestyle Lump Sum earn $21.8 billion in revenue in 2022. A host of newer policies are » The market size of the disability insurance industry is expected to increase by 2.3% in 2022. addressing areas of disability that can protect lifestyles even better. One newer evolu» The number of motor vehicle accidents is tion of disability insurance can expected to increase in 2022, which could now add an additional layer of represent the biggest opportunity for growth in the disability insurance industry. coverage for professionals to insure their lifestyles in the form of a lump-sum benefit. SOURCE: IBISworld With many pressures on our incomes and so many complex matters that all depend on our incomes, it is no wonder that DI is critically important for professionals. Factoring in additional drains on incomes due to divorce situations (alimony and child support) education funding, real estate, various business promises (leases, salaries, etc.) and medical expenses, DI is a critical component of every financial plan. Unless your client has an ultra-wealthy relative, it highly unlikely they have anyone they can turn to for help paying their bills if they become disabled. Martin Levy, CLU, RHU, is president and founder of Corporate Strategies in Woodland Hills, Calif. He is a 30-year industry veteran and a lifetime member of Million Dollar Round Table. He may be contacted at martin.levy@ innfeedback.com.

Americans Look To Bridge Financial Gaps Americans reported that their top five biggest financial advice gaps are: handling market volatility emotionally, choosing appropriate investments, estimating required minimum withdrawals, making buy/sell decisions on investments and estate planning. That’s according to a recent Hearts & Wallets report.

Younger consumers especially need help in bridging those gaps, the report said. Millennials and Generation X consumers who said that COVID-19 changed their attitudes toward saving and investing are especially likely to seek help on multiple tasks, including estate planning, according to the report.

More U.S. households reported seeking help for multiple financial tasks, with growth being driven by households with $100,000 to under $500,000 in assets, according to the survey. Nationally, 3 in 10 households sought help on 3-plus tasks in 2021, a year-over-year increase of 4 percentage points and up 8 percentage points since 2014.

In comparison to older generations, millennials and Gen-Xers are more likely to seek help for multiple financial tasks, seeking help for 3-plus tasks, and often, as many as 7-plus. Millennials are twice as likely as baby boomers to seek help on multiple tasks.

Millennial, Gen X Families Struggling The financial picture for today’s early- and mid-career employees looks markedly different from that of yesterday’s early- and mid-career employees. A study from the Employee Benefit Research Institute found that

Generation X families were less likely to own a home or have any retirement plan, and they were more likely to have debt than baby boomer families did at the same ages.

When looking at the financial picture of early-career employees, millennials face a dramatically different experience than Gen X did. For example, homeownership rates were lower for millennials than for Gen X at the same ages. Even more sobering, the median net worth of millennial families was lower than for Gen X families of the same ages. Investors Fear Inflation, But Also Don’t Invest Accordingly A Hartford Funds survey shows investors are split on how inflation and the Fed impact their investment decisions. The majority of investors demonstrated an understanding of inflation, with

three-quarters (75%) identifying the correct definition of the market phe-

nomenon. Younger generations, however, struggled with correctly defining inflation compared with older generations (54% vs. 86%) and worry more about the phenomenon impacting their day-to-day finances (78% vs. 71%).

As for the Fed’s role in curbing inflation, more than half (56%) of inves-

tors believe that rising interest rates will have a “significant” or “mod-

erate” impact on curbing inflation. Younger generations are more likely to believe this, compared with older generations (71% vs. 47%). In fact, 35% of younger investors are more optimistic that rising interest rates will have a significant impact on curbing inflation, which is a 14% increase from the aggregate of all investors (21%).

The data also suggests that the number of rate hikes investors are expecting this year will impact where they invest. If their rate hike expectations are correct, 94% of younger investors expect to change their investment decisions in some form, while only 72% of older generations are expected to do the same.

In Search Of A Comfortable Retirement

A comfortable retirement is near the top of most Americans’ life goals, yet a large percentage are unsure about how to achieve it. A Principal Financial Group survey revealed only 49% of those polled have confidence that their savings will be enough, and a further 55% don’t feel secure in their retirement planning.

Fifty percent of workers are either unsure how much they should be saving for retirement, or know they are saving less than they should be to reach their goals. Today’s workers cite “when I’ve saved enough” or “when I cannot do the work any longer” as determining factors for retirement.

The majority of workers lack confidence that Social Security will be available to them, with 64% citing its viability for them as a concern, including a whopping 73% of Generation Z workers.

DID YOU KNOW?

64% of financial advisors have a

SUCCESSION PLAN.

SOURCE: Smart Asset